Question 1

If the productivity of capital in low-income nations is substantially lower than productivity in high-income nations, then:
A) output per worker will never catch up to the rich nations, even with access to capital markets.
B) productivity of capital can be improved by better training of workers and more foreign investment.
C) output per worker will grow more slowly, but at some point there will be convergence.
D) the low-income nations will lose their ability to borrow in international markets.

Accepted Answer

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Question 2

As long as at least some output shocks are asymmetric, it is possible to:
A) avoid all risk.
B) lower the volatility of income by international diversification of capital assets.
C) lower the risk of default.
D) avoid any consumption declines as a result of the shocks.

Accepted Answer

International diversification of capital assets can help lower the volatility of income by spreading out risk across multiple countries and industries. However, it is not possible to avoid all risk or completely eliminate consumption declines resulting from output shocks. Additionally, the presence of asymmetric shocks means that there is still some inherent risk involved even with international diversification.

Question 3

Nations can lower risk via asset diversification. How do nations engage in diversification?
A) by investors relying on mutual funds instead of choosing their own stocks
B) by directing some investment activities abroad and some domestically
C) by buying private insurance against devaluation
D) by restricting all investment toward domestic capital

Accepted Answer

By directing some investment activities abroad and some domestically, nations can spread their risk and reduce their vulnerability to domestic economic conditions. This can be achieved through various means, such as investing in foreign stocks, bonds or real estate, setting up foreign subsidiaries or joint ventures, or participating in international trade. Restricting all investment toward domestic capital or relying only on private insurance may not provide adequate diversification, while relying on mutual funds may not be a strategy that nations engage in directly.

Question 4

It has been shown that although investors could lower volatility and earn a higher average return on a diversified portfolio:
A) there seems to be a home bias factor, which reveals that investors favor domestic investments.
B) there are downside risks not recognized by the market.
C) most governments limit international investment.
D) investors prefer focusing on overseas investments.

Accepted Answer

Research has shown that investors tend to favor domestic investments, despite the benefits of diversification. This tendency is known as the "home bias factor." Therefore, while a diversified portfolio may lower volatility and earn a higher average return, many investors may still not invest internationally due to their preference for domestic investments. Options B, C, and D are not supported by the information provided.

Question 5

Economists are increasingly convinced that institutions, public policies, or culture may influence a nation's productivity more than technology acquisition. This impact is known as:
A) technical efficiency.
B) cultural norms.
C) welfare economics.
D) social efficiency.

Accepted Answer

Social efficiency refers to the optimal distribution of resources in society, taking into account all externalities and benefits to society beyond individual or corporate gains. This concept encompasses how institutions, public policies, and culture can influence a nation's productivity, often more significantly than the mere acquisition of technology. It highlights the importance of societal factors in economic performance.

Question 6

Risk sharing through asset trade internationally is limited because:
A) not all capital assets can be traded internationally, and the number of assets is comparatively small.
B) laws prohibit many kinds of international investment.
C) returns on international assets are usually lower.
D) there is a larger risk of currency devaluation.

Accepted Answer

Not all capital assets can be easily traded internationally and the number of assets that can be traded is limited. This restricts the ability to share risk through asset trade. Laws and regulations may also limit international investment, but this is not the main limiting factor for risk sharing through asset trade. Returns on international assets may be lower, but this is not a limiting factor for sharing risk through asset trade. While currency devaluation does present a risk, it is not the primary factor limiting risk sharing through asset trade.

Question 7

It is better to invest in a country whose shocks:
A) are positively correlated with yours.
B) are independent of yours.
C) are negatively correlated with yours.
D) are common to yours.

Accepted Answer

Investing in a country whose shocks are negatively correlated with yours can help diversify your portfolio and balance out potential losses in one market with gains in the other. It is also a way to minimize overall risk.

Question 8

To analyze the long-run constraint on international borrowing, we make simplifying assumptions to calculate changes in a nation's external wealth. Discuss these assumptions and tell why they are important to the model.

Accepted Answer

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Question 9

In addition to the other problems of low-income nations is the relative disadvantage they face in the international capital markets. What are some issues related to low-income nations, and what effect do they have on their ability to access international capital markets?

Accepted Answer

The answer of In addition to the other problems of...

Question 10

Poor nations are often poorly equipped to provide social capital, and compared with rich nations:
A) the cost of labor is very high.
B) the cost of producing social capital is higher in poor nations.
C) there is too much social legislation.
D) they have meager tariff revenues and so cannot afford basic necessities.

Accepted Answer

Poor nations often lack the resources and infrastructure needed to provide adequate social capital, such as education, healthcare, and social services. The cost of producing and maintaining social capital is often higher in poor nations due to limited funding and resources, making it difficult to build and sustain these services. This lack of social capital can perpetuate poverty and exacerbate existing social and economic inequalities.

Question 11

Explanations for behavior seeming to favor domestic investments over international investments might include:
A) the provincial nature of investors.
B) the fact that many domestic corporations already incorporate international assets and foreign operations.
C) globalization has not caught on in the financial markets.
D) language and cultural barriers.

Accepted Answer

Many domestic corporations already incorporate international assets and foreign operations, making domestic investments more familiar and potentially more profitable for investors.

Question 12

Whenever economic shocks are asymmetric, affecting only one nation among all the nations that are mutual investors, asset diversification:
A) will have substantial benefits in lessening the shocks and smoothing consumption.
B) will have no measurable benefits in lessening shocks.
C) will probably backfire as one nation gains while the other loses.
D) creates a tense atmosphere in which profits take precedence over human welfare.

Accepted Answer

Asset diversification can help lessen the impact of economic shocks by spreading the risk across different assets and markets. This can provide a buffer against losses in a particular country or region and help smooth consumption. Therefore, option A is the correct choice. Option B is incorrect as diversification does provide measurable benefits. Option C is incorrect as diversification is not a zero-sum game and can benefit all parties involved. Option D is incorrect as diversification does not necessarily create a tense atmosphere or prioritize profits over human welfare.

Question 13

What is a "sudden stop" and what are the consequences?

Accepted Answer

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Question 14

What is the primary role of the World Bank?
A) to pay a high return on investments
B) to provide loans for technical development
C) to provide loans for stabilizing exchange rates
D) to provide free checking to poor people

Accepted Answer

The primary role of the World Bank is to provide loans for technical development, particularly in developing countries. The World Bank aims to reduce poverty and promote sustainable economic growth through financing projects in areas such as infrastructure, education, and health. The other choices are not accurate descriptions of the World Bank's role.

Question 15

How would one explain the seemingly contradictory situation that exists for the United States: How does the United States, despite a large external debt, enjoy being a net recipient of interest payments?

Accepted Answer

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Question 16

A major factor affecting investment opportunities in rich versus poor nations, aside from the productivity of capital is:
A) population growth.
B) risk factors that threaten investment.
C) government meddling in the affairs of business.
D) tax burdens on wealthy individuals.

Accepted Answer

Risk factors such as political instability, corruption, natural disasters, and security threats can greatly affect investments in both rich and poor nations. Investors are willing to take on higher risks for potentially higher returns, but the risks must be manageable and not outweigh the potential gains. In poor nations, these risk factors are often magnified, making it less attractive for investors to put their money into those economies.

Question 17

If a nation diversifies its capital portfolio so that it owns some foreign capital and foreigners own a percentage of the nation's capital, then:
A) domestic returns will be lower.
B) domestic returns will be higher.
C) domestic returns will equal international returns.
D) the nation will earn an average return, and its consumption will remain stable in the event of output shocks.

Accepted Answer

Diversifying a capital portfolio by owning foreign capital and allowing foreigners to own domestic capital helps a nation to spread its risk. This means that if there's an economic downturn or output shock in the nation, the impact on consumption can be mitigated by the returns from foreign investments. Similarly, foreign investments in the nation can provide stability. This strategy does not necessarily equalize domestic and international returns or guarantee higher or lower domestic returns directly, but it aims to achieve an average return that supports stable consumption levels.

Question 18

Explain the concept of consumption smoothing in your own words.

Accepted Answer

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Question 19

Give an intuitive explanation for the long-run budget constraint.

Accepted Answer

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Question 20

Two nations each own 50% of the capital of the other nation (diversification). What is the situation when labor composes more than 50% of available resources?
A) In order to achieve perfect diversification, labor must move from one nation to the other.
B) No gain will occur from the diversification.
C) The risk from economic shock will be eliminated by the diversification of assets.
D) Some risk from economic shocks can be eliminated, but not all.

Accepted Answer

Diversification of capital ownership may help to reduce some risk from economic shocks, but if labor still composes more than 50% of available resources, there may still be some risk involved. Therefore, Option D is the best choice. Option A is not necessarily true as labor mobility may not always be feasible or practical. Option B is not accurate as diversification can still provide some benefits. Option C oversimplifies the situation and does not take into account other factors that may contribute to economic shocks.

Quiz 17: Balance of Payments I: the Gains From Financial Globalization

If the productivity of capital in low-income nations is substantially lower than productivity in high-income nations, then:

As long as at least some output shocks are asymmetric, it is possible to:

Nations can lower risk via asset diversification. How do nations engage in diversification?

It has been shown that although investors could lower volatility and earn a higher average return on a diversified portfolio:

Economists are increasingly convinced that institutions, public policies, or culture may influence a nation's productivity more than technology acquisition. This impact is known as:

Risk sharing through asset trade internationally is limited because:

It is better to invest in a country whose shocks:

To analyze the long-run constraint on international borrowing, we make simplifying assumptions to calculate changes in a nation's external wealth. Discuss these assumptions and tell why they are important to the model.

In addition to the other problems of low-income nations is the relative disadvantage they face in the international capital markets. What are some issues related to low-income nations, and what effect do they have on their ability to access international capital markets?

Poor nations are often poorly equipped to provide social capital, and compared with rich nations:

Explanations for behavior seeming to favor domestic investments over international investments might include:

Whenever economic shocks are asymmetric, affecting only one nation among all the nations that are mutual investors, asset diversification:

What is a "sudden stop" and what are the consequences?

What is the primary role of the World Bank?

How would one explain the seemingly contradictory situation that exists for the United States: How does the United States, despite a large external debt, enjoy being a net recipient of interest payments?

A major factor affecting investment opportunities in rich versus poor nations, aside from the productivity of capital is:

If a nation diversifies its capital portfolio so that it owns some foreign capital and foreigners own a percentage of the nation's capital, then:

Explain the concept of consumption smoothing in your own words.

Give an intuitive explanation for the long-run budget constraint.

Two nations each own 50% of the capital of the other nation (diversification) . What is the situation when labor composes more than 50% of available resources?